Lumber Liquidators, residential building and Fuse: Strategic Exchange

By Kemp Harr

With all the optimism leading into 2015, it appears that, on average, the residential sector of the flooring business has been softer than many economists anticipated. The commercial business, on the other hand, is performing much better, with the education, healthcare and retail sectors leading the way. Residentially, the dealers who know how to attract themselves to the more affluent consumer are doing better than those who position themselves on the value end of the market.

From a macro perspective, retail sales for the first quarter are falling below initial projections as households choose to save rather than spend. And weather appears to be a factor once again. Not only has heavy snow in the Northeast hampered mobility, but also extreme cold appears to have shifted some of the gas-pump savings into utility bills. While last year had pockets of extreme cold, this year’s chill was more prolonged, and so demand for heating in the first quarter was up 45% compared to last year, according to the National Oceanic and Atmospheric Association. Weather also negatively impacted the first quarter housing numbers.

The good news, however, is that the weather is now behind us, and many pundits feel that spending has been delayed—not impaired. Oil prices are still low, people are employed, there is little, if any, inflation and confidence numbers are still high, so residential sales figures in April should tick back in line with the expectations we had at the beginning of the year.

One recent news story that gives credence to continued optimism for the year is the 19% uptick in new home orders placed with three of the nation’s top homebuilders in the first quarter.

WHAT WAS LUMBER LIQUIDATORS THINKING?
I’m sure the folks at Lumber Liquidators (LL) would agree that March lived up to its reputation as a month that came roaring in like a lion. The big question now, as we look back at the story, is how this revelation will affect not only LL’s business but also the industry overall in the long term. 

It was Sunday, March 1 when 60 Minutes first ran the news story that 30 out of 31 boxes of LL’s laminate flooring failed to pass the California Air Resource Board’s (CARB) test for acceptable levels of formaldehyde, a cancer-causing chemical. In fact, in a few of the tests, the formaldehyde levels were so high that the test lab thought its equipment was broken. As the story unfolded, it was revealed that the factory that produced the flooring for LL knew that it did not meet the CARB safety standards, even though the packaging said that it did.

On the following day, Kip Howlett, president of the Hardwood Plywood and Veneer Association, revealed in a FloorDaily interview that factories have known for some time that they can reduce their cost and run their manufacturing equipment faster if they use adhesives with high levels of formaldehyde. Howlett went on to say that this gives the Chinese producers an unfair pricing advantage over domestic producers who must comply with the federal and state health and safety standards. The 60 Minutes story estimated that price differential between compliant and non-compliant laminate can be as much as 10% to 15%.

Tom Sullivan, who founded LL, agreed to do an on-camera interview with 60 Minutes so he could refute the CARB test method as “not being real world,” and he blamed much of these accusations against LL on a hedge fund firm, which he claimed was trying to profit by short selling the company’s stock.

Over a ten-day period, the company’s stock price lost more than half of its value, as it tumbled from just under $70/share to well below $30/share. On March 12, it looked like the stock value might start to recover when LL’s CEO, Rob Lynch, hosted an investor conference call where he challenged the CARB “deconstructed” test method, which prescribes that the top layer of the product be removed prior to the test. During that call, the company announced that it was offering free OHSA formaldehyde test kits to concerned customers who had purchased a laminate floor. However, according to Howlett, the CARB permissible exposure limit for formaldehyde is significantly lower then the OSHA level—by a factor of ten. 

We may never know how high up the management ladder the LL sourcing decisions were being made. When you step back and analyze the numbers, it reveals that only 19% of LL’s revenue comes from laminate flooring sales, and, out of that, 52% is sourced from China. If buying noncompliant flooring saved the company 10% at cost, it seems ludicrous to think that the reputation of this billion-dollar company with 352 stores in 46 states was risked for roughly $7 million worth of profit. 

Today, many people are wondering if LL will survive. Not only does the company now face multiple class-action lawsuits from a collective group of laminate flooring consumers over the formaldehyde issue, but also several U.S. senators are jumping in and calling for further investigation from multiple federal agencies. In addition, a long-term investor is accusing Sullivan and Lynch of insider trading because they sold $19 million worth of stock at inflated prices before the company announced, in 2013, that it faced criminal charges under the Lacey Act for illegally harvesting trees in Russia—charges that are still unresolved.

The bigger question is what impact this ongoing fiasco with Lumber Liquidators will have on the flooring business. Who is going to sell the billion dollars worth of flooring that LL was in line to sell? How much share does the company lose as it fights to survive? Is the LL shopper more inclined to go to the home center than to the specialty retailer? Does this episode make the consumer wary of buying flooring that is made in China? And does LL’s infraction hurt the whole laminate flooring category?

Ultimately, I believe LL’s troubles are good news for the professional retailer who conducts his business in an ethical and transparent manner. Once again, the consumer must face the reality that bargains that appear too good to be true often are. Consumers buy from people they know, like and trust. 

As a side note, Bob Vila sure knows how to pick a winner—first Sears and now Lumber Liquidators.

FCIF GALA RECOGNIZES INDUSTRY LEADERS
In mid-March, 270 flooring professionals met in New York City to support the Floor Covering Industry Foundation, the charitable organization that has given over $3 million to people in the industry who have suffered a catastrophic setbacks such as illness, severe disability or another life-altering hardship. The goal of this event was to raise $200,000 as well as to recognize some of the leadership within the floorcovering industry and provide an industry networking opportunity. Special honorees for the event were Keith Campbell, CEO of Mannington, and the late Chris Davis, former CEO of the World Floor Covering Association. But in addition, all of the previous industry Hall of Fame recipients were recognized. Howard Brodsky, who served as master of ceremonies, reminded those in attendance of the significance of the flooring industry, not only in terms of the critical role played by flooring in the interior space but also in terms of its community, the 250,000 people work in every aspect of the industry.

It had been eight years since the black-tie gala was last held, and it is interesting to take note of the changes in the industry during that period. In that time, the industry has survived a massive recession and continued to consolidate but also welcomed in new players that weren’t even on the radar back then. There have been a few deaths and also some turnover in top leadership positions, but for those of you who missed it, let me report that there is still a core group of stewards who are passionate about this business and who also clean up quite nicely. Look for photos of the event on FloorDaily.

FUSE SEEKS TO BUILD REPUTATION AS “GO-TO” DEALERS 
The Fuse Commercial Flooring Alliance gathered last month in Las Vegas for its annual meeting. This co-op of commercial flooring contractors now has 75 member companies, which on average do about $15 million a year in annual revenue. The biggest takeaway from this annual gathering is the emphasis they are putting on raising their visibility and clarifying their message. Fuse’s goal is to build its reputation with end-users (facility managers) and designers (A&D) as the “go-to” advisors for floorcovering selection and installation.

At this year’s meeting, in addition to the usual seminars on moisture, liability and succession planning, time was also devoted to search engine optimization and social media. Geoff Gordon, who recently took the helm as the group’s executive director, pointed out that “business from a designer’s perspective is youth oriented,” and commercial contractors need to learn how to reach that audience digitally. 

Fuse continues to build out its national account program, which is branded Fuse Commercial, and Gordon estimates that about 10% of the end-user customers in the commercial space would rather buy their flooring direct, especially those companies that have multiple locations throughout the country. 

One somber note, from my perspective, is that this was obviously Ron Lee’s last meeting as he prepares for retirement this fall. Lee served as president of Duffy and Lee for 23 years, from 1966 to 1989. After that, he was instrumental in founding Starnet and served as its COO for over five years. He then joined Interface as president and CEO of Interface’s network of contract dealers, until the firm exited that business four years later. And for the last nine years, Lee has been executive director for Fuse. Lee is one of the most respected leaders in the commercial flooring sector, and he will be sincerely missed in this business. There is not doubt that the organization is in great hands with Gordon, but we’ll all miss Lee, who turns 70 this fall.

THE IMPACT OF CURRENCY FLUCTUATIONS 
It’s worth noting that the U.S. dollar jumped to an 11-year high versus the euro and reached the strongest level in seven years against the yen last month. It will be interesting to see what impact this will have on the floorcovering business. When the dollar is strong, U.S. made products are less competitive in a global market and imports are cheaper.

Related Topics:Fuse, RD Weis, Lumber Liquidators, Fuse Alliance, Mannington Mills, Interface, Starnet